|NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
|| NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Nature of Operations
Sinclair Broadcast Group, Inc. (the Company) is a diversified television broadcasting company with national reach and a strong focus on providing high-quality content on our local television stations and digital platforms. The content, distributed through our broadcast platform, consists of programming provided by third-party networks and syndicators, local news, and other original programming produced by us. We also distribute our original programming, and owned and operated network affiliates, on other third-party platforms. Additionally, we own digital media products that are complementary to our extensive portfolio of television station related digital properties. Outside of our media related businesses, we operate technical services companies focused on supply and maintenance of broadcast transmission systems as well as research and development for the advancement of broadcast technology, and we manage other non-media related investments.
As of June 30, 2019, our broadcast distribution platform is a single reportable segment for accounting purposes. It consists primarily of our broadcast television stations, which we own, provide programming and operating services pursuant to agreements commonly referred to as local marketing agreements (LMAs), or provide sales services and other non-programming operating services pursuant to other outsourcing agreements (such as joint sales agreements (JSAs) and shared services agreements (SSAs)), to 191 stations in 89 markets. These stations broadcast 604 channels as of June 30, 2019. For the purpose of this report, these 191 stations and 604 channels are referred to as "our" stations and channels.
Principles of Consolidation
The consolidated financial statements include our accounts and those of our wholly-owned and majority-owned subsidiaries and variable interest entities (VIEs) for which we are the primary beneficiary. Noncontrolling interest represents a minority owner’s proportionate share of the equity in certain of our consolidated entities. All intercompany transactions and account balances have been eliminated in consolidation.
We consolidate VIEs when we are the primary beneficiary. We are the primary beneficiary of a VIE when we have the power to direct the activities of the VIE that most significantly impact the economic performance of the VIE and have the obligation to absorb losses or the right to receive returns that would be significant to the VIE. See Note 8. Variable Interest Entities for more information on our VIEs.
Investments in entities over which we have significant influence but not control are accounted for using the equity method of accounting. Income from equity method investments represents our proportionate share of net income generated by equity method investees.
Interim Financial Statements
The consolidated financial statements for the three and six months ended June 30, 2019 and 2018 are unaudited. In the opinion of management, such financial statements have been presented on the same basis as the audited consolidated financial statements and include all adjustments, consisting only of normal recurring adjustments necessary for a fair statement of the consolidated balance sheets, consolidated statements of operations, consolidated statements of comprehensive income, consolidated statements of equity, and consolidated statements of cash flows for these periods as adjusted for the adoption of recent accounting pronouncements discussed below.
As permitted under the applicable rules and regulations of the Securities and Exchange Commission (SEC), the consolidated financial statements do not include all disclosures normally included with audited consolidated financial statements and, accordingly, should be read together with the audited consolidated financial statements and notes thereto in our Annual Report on Form 10-K for the year ended December 31, 2018 filed with the SEC. The consolidated statements of operations presented in the accompanying consolidated financial statements are not necessarily representative of operations for an entire year.
We measure our investments, excluding equity method investments, at fair value or, in situations where fair value is not readily determinable, we have the option to value investments at cost plus observable changes in value less impairment. Investments accounted for utilizing the measurement alternative were $23.0 million, net of $1.6 million of cumulative impairments, as of June 30, 2019 and $24.5 million as of December 31, 2018. For the six months ended June 30, 2019, we recorded a $1.6 million impairment related to one investment accounted for utilizing the measurement alternative, which is reflected in other income, net in our consolidated statements of operations. For the three months ended June 30, 2019 and the three and six months ended June 30, 2018, there were no adjustments to the carrying amount of investments accounted for utilizing the measurement alternative.
Use of Estimates
The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, and expenses in the consolidated financial statements and in the disclosures of contingent assets and liabilities. Actual results could differ from those estimates.
Recent Accounting Pronouncements
In February 2016, the Financial Accounting Standards Board (FASB) issued new guidance related to accounting for leases, Accounting Standards Codification Topic 842 (ASC 842). We adopted the new guidance on January 1, 2019 using the modified retrospective approach and the optional transition method. Under this adoption method, comparative prior periods were not adjusted and continue to be reported in accordance with our historical accounting policy. We elected to apply the package of practical expedients permitted under the transition guidance within the new standard, which, among other things, allowed us to carryforward our historical assessments of whether contracts are, or contain, leases and lease classification. The primary impact of adopting this standard was the recognition of $215.2 million of operating lease liabilities and $196.1 million of operating lease assets, upon adoption. The adoption did not have a material impact on how we account for finance leases. See Note 4. Leases for more information regarding our leasing arrangements.
In August 2018, the FASB issued guidance which aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software, with the capitalized implementation costs of a hosting arrangement that is a service contract expensed over the term of the hosting arrangement. The new standard is effective for interim and annual reporting periods beginning after December 15, 2019, applied either retrospectively or prospectively to all implementation costs incurred after the date of adoption. Early adoption is permitted. We are currently evaluating the impact of this guidance on our consolidated financial statements.
In October 2018, the FASB issued guidance for determining whether a decision-making fee is a variable interest. The amendments require organizations to consider indirect interests held through related parties under common control on a proportional basis rather than as the equivalent of a direct interest in its entirety (as currently required in GAAP). The new standard is effective for interim and annual reporting periods beginning after December 15, 2019, applied retrospectively. Early adoption is permitted. We are currently evaluating the impact of this guidance on our consolidated financial statements.
In March 2019, the FASB issued guidance which requires that an entity test a film or license agreement within the scope of Subtopic 920-350 for impairment at the film group level, when the film or license agreement is predominantly monetized with other films and/or license agreements. The new standard is effective for interim and annual reporting periods beginning after December 15, 2019, applied prospectively. Early adoption is permitted. We are currently evaluating the impact of this guidance on our consolidated financial statements.
The following table presents our revenue disaggregated by type and segment (in thousands):
Three Months Ended
June 30, 2019
June 30, 2018
Other media and non-media revenues
Six Months Ended
June 30, 2019
June 30, 2018
Other media and non-media revenues
Advertising Revenue. We generate advertising revenue primarily from the sale of advertising spots/impressions on our broadcast television and digital platforms.
Distribution Revenue. The Company generates distribution revenue through fees received from multi-channel video programming distributors (MVPDs) and virtual MVPDs for the right to distribute our stations and other properties on their respective distribution platforms.
In accordance with ASC 606, we do not disclose the value of unsatisfied performance obligations for (i) contracts with an original expected length of one year or less and (ii) distribution arrangements which are accounted for as a sales/usage based royalty.
Deferred Revenues. We record deferred revenues when cash payments are received or due in advance of our performance, including amounts which are refundable. Deferred revenues were $67.8 million and $83.3 million as of June 30, 2019 and December 31, 2018, respectively. Deferred revenues recognized during the six months ended June 30, 2019 and 2018 that were included in the deferred revenues balance as of December 31, 2018 and 2017 were $56.0 million and $21.5 million, respectively.
Our income tax provision for all periods consists of federal and state income taxes. The tax provision for the three and six months ended June 30, 2019 and 2018 is based on the estimated effective tax rate applicable for the full year after taking into account discrete tax items and the effects of the noncontrolling interests. We provide a valuation allowance for deferred tax assets if we determine that it is more likely than not that some or all deferred tax assets will not be realized. In evaluating our ability to realize net deferred tax assets, we consider all available evidence, both positive and negative, including our past operating results, tax planning strategies and forecasts of future taxable income. In considering these sources of taxable income, we must make certain judgments that are based on the plans and estimates used to manage our underlying businesses on a long-term basis. A valuation allowance has been provided for deferred tax assets related to a substantial portion of our available state net operating loss (NOL) carryforwards, based on past operating results, expected timing of the reversals of existing temporary book/tax basis differences, alternative tax strategies and projected future taxable income.
Our effective income tax rate for the three and six months ended June 30, 2019 was less than the statutory rate primarily due to $8.3 million and $13.0 million, respectively, of federal tax credits related to investments in sustainability initiatives. Our effective income tax rate for the three months ended June 30, 2018 was less than the statutory rate primarily due to $5.2 million of federal tax credits related to investments in sustainability initiatives and a $4.2 million state benefit related to a change in apportionment estimates on recognition of previously deferred tax gain from the sale of certain broadcast spectrum in connection with the Broadcast Incentive Auction. Our effective income tax rate for the six months ended June 30, 2018 was less than the statutory rate primarily due to a $17.7 million permanent tax benefit recognized from an IRS tax ruling on the treatment of the gain from the sale of certain broadcast spectrum in connection with the Broadcast Incentive Auction and $6.3 million federal tax credits related to investments in sustainability initiatives.
Share Repurchase Program
On August 9, 2018, the Board of Directors authorized a $1.0 billion share repurchase authorization, in addition to the previous repurchase authorization of $150.0 million. There is no expiration date and currently, management has no plans to terminate this program. For the three and six months ended June 30, 2019, we repurchased 0.5 million shares of Class A Common Stock for $20.0 million and 4.0 million shares of Class A Common Stock for $125.0 million, respectively. As of June 30, 2019, the total remaining purchase authorization was $743.0 million.
In August 2019, our Board of Directors declared a quarterly dividend of $0.20 per share, payable on September 16, 2019 to holders of record at the close of business on August 30, 2019.
In July 2019, we announced that we will redeem, in full, $600.0 million of Sinclair Television Group's (STG) 5.375% Senior Unsecured Notes due 2021 on August 13, 2019. See STG 5.375% Senior Unsecured Notes under Note 3. Notes Payable and Commercial Bank Financing for further discussion.
On August 2, 2019, in connection with the pending acquisition of the RSNs, Diamond Sports Group, LLC (Diamond) and Diamond Sports Finance Company (Diamond Co-Issuer), both indirect wholly-owned subsidiaries of the Company, issued $3.050 billion principal amount of senior secured notes, which bear interest at a rate of 5.375% per annum and mature on August 15, 2026 (the "Diamond 5.375% Secured Notes") and issued $1.825 billion principal amount of senior notes, which bear interest at a rate of 6.625% per annum and mature on August 15, 2027 (the "Diamond 6.625% Notes" and, together with the Diamond 5.375% Secured Notes, the "Diamond Notes"). See RSN Debt Financing under Note 3. Notes Payable and Commercial Bank Financing for further discussion.
Certain reclassifications have been made to prior years' consolidated financial statements to conform to the current year's presentation.